Risk and Reward: sustaining a higher value-added economy - Business and Enterprise Committee Contents


Examination of Witnesses (Questions 260-279)

ADVANTAGE WEST MIDLANDS

12 MAY 2008

  Q260 Chairman: Gentlemen, welcome to the second part of this evidence session. I am sorry we are running rather late, but it was an interesting session; we found it really valuable. If we can all be quite economic with our questions and our answers, I think that would help us make sure we are not too late for Warwick University, our next stop. I was very grateful for your written submission, which I have read. You suggest that there is a limited role for Advantage West Midlands within the economy because ultimately market forces dictate your direction. Can you explain to me how you reconcile that with your really quite interventionist agenda?

  Mr Laverty: I am not sure that is what we meant, and if that is what you have inferred from our submission it is slightly different from what we meant. What we said is it is very difficult for us, over a short period of time, or for any public sector organisation to change the structure of a region's economy. We have no pharmaceuticals industry, no oil and gas, no merchant banks, the typical high value added sectors, and it would take some time to build up specialisms in those areas, if we could indeed do that at all. I think what we said is a role for Advantage West Midlands and other public sector organisations working in partnership with Advantage West Midlands is to build on the strength we have and improve the base of businesses we have, so there are some things we are doing around energy technology, for example, to try and look to some of the high value added sectors of tomorrow, energy futures, energy activity, particularly with the East Midlands Development Agency securing the Energy Technology Institute as a good example in the Midlands, but the big task for us is to work with the current business base and move that business base as a high value added chain in terms of product services and the skills of its work force.

  Dr Hutchins: For example, through the work we have been leading with the Manufacturing Advisory Service in the West Midlands, which is widely regarded nationally as one of the best Manufacturing Advisory Services, MAS has been working with a company called Bromsgrove Glass, a traditional window manufacturing company, a relatively large employer, and they have been trying to diversify, implement new technology, and have been working with the Manufacturing Advisory Service through its Product Innovation Consortium to move into new areas where investment in R&D and innovation is critical.

  Q261  Chairman: So you have to take the world as it is, or the region, not as what you might like it to be?

  Mr Laverty: We have one eye on tomorrow and trying to work towards a positive future, but are working here with the Midlands today and trying to change them as well.

  Q262  Roger Berry: You made a point stressing at the outset that the West Midlands has a poor overall track record in innovation. What are the reasons for that?

  Dr Extance: One of the glaring statistics is the business expenditure on R&D, where we are seventh out of ninth, but we have already said that we are not well represented in the oil and gas industry or the pharmaceutical industry which, of course, are sectors very largely responsible for large chunks of business expenditure in R&D. If you then add on to that the fact that we do not have the big government research centres, the public sector research laboratories. We do have things like QinetiQ, who are a major source of R&D—I think you are visiting them tomorrow—and are responsible for very significant and world class social development, as are Jaguar and Land Rover, and, indeed, many of the aerospace companies that you all know of. One of the challenges is the measurement of innovation by the business expenditure in R&D, that is the classic challenge which we refer to in our submission. That is how you measure innovation as opposed to the input measures of research and development, and that seventh out of ninth of course is very misleading, particularly if you then look at the service sector, or something like digital media. There we have just announced a major investment with Channel 4, a £5 million investment by AWM matched by Channel 4, to develop innovative digital media in the region, and that would not have been measured in the traditional R&D statistics, it would have been seen as production though, in fact, of course, in that service-orientated sector it is effectively research and development.

  Q263  Roger Berry: Yes, you do make the point that investment R&D is a proxy, though arguably not a very good one, for innovation. In terms of your role as an RDA in improving innovation in the West Midlands, what do you see as your main levers? What are the levers you can pull that you think are most effective in improving innovation?

  Mr Laverty: I think there is a basket of levers we have tried; there is no one lever we use. There is a range. You might have heard of INDEX vouchers that we have introduced which were piloted over the last couple of years, and we are rolling that out now. It has been quite a success. Our mission is to try and commercialise some of the science and technology that is buried in some of our universities and research establishments by connecting it with business organisations, so there is a classic example of trying to get businesses, universities, and higher education establishments to interact and collaborate. We are not pretending a £3,000 voucher is going to lead to world-breaking innovative activity but it might be the start of a relationship that does just that, so that is the intention behind that. We have also on a slightly larger scale done something called Science City, which is a project we are working on with Warwick and Birmingham Universities. That is an £80 million project trying to get two of our most prominent research organisations in the West Midlands to collaborate and use their complementary strengths to produce the demonstrator activity and to try and articulate the benefit of some of these technologies to the businesses in the region to try and do something to technology transfer activity. That is another strand of what we do with these technology transfer partnerships, and then very specifically we do things like work with organisations like QinetiQ to drive out in a project, in this instance a Sensor project, some well-established technology that is buried in QinetiQ and try and embed that in West Midlands business organisations to drive up the value of what they do. So there is a wide range of things we do, and not least we should not forget about the skills agenda. We see the two big challenges in this region are low levels of innovation and lower levels of high level 4 and above skills. Now, there is a good correlation between successful companies and those companies that invest in their workforce and invest in their products and services, so at the same time as we are trying to encourage people to innovate we are also trying to encourage them to take on graduates or invest in their workforce to try and attack it from that end as well.

  Q264  Roger Berry: In your submission to the Committee you write that there are numerous examples of world leading companies in the West Midlands, you mentioned QinetiQ, Jaguar, Land Rover, et cetera, and you have described your work with QinetiQ, but with these world leading companies that are in the West Midlands, what is your role? Are there some of them that are simply self-motivating, self-innovating, who do not need your expertise, but others that do need your expertise for particular niche activity? Your work in QinetiQ is part of that, presumably. Do you see your job to back these winners, or do you see your job more to help those SMEs that are not yet in that category?

  Mr Laverty: I think the first. It is a bit like a marriage bureau role, you are in between the businesses and the organisations that have the research establishments and the higher education establishments, and you are trying to bring them together and encourage them to collaborate in whatever way you can. If you take the Sensor project at QinetiQ there were a number of facets to that project. First and foremost, QinetiQ are very important to us in this region. They have 2500 people down at QinetiQ doing the jobs we are trying to attract, so first and foremost we are trying to keep QinetiQ happy and make sure we have our arm around them and they feel valued and wanted. Secondly, on that particular project they have a lot of technology that is commercially applicable, but have no particular incentive themselves to work with small businesses in the West Midlands, other than for altruistic reasons which clearly are not very forceful, so we got in the middle of them and the businesses who could benefit from that collaboration and made it worth their while, took some of the risk out of it and put some momentum into it to encourage people. So that is an example of what we see our role to be. It is a bit like the INDEX vouchers—we are between the organisations who have got the intelligence and the research and the organisations who need it, and are trying to encourage that collaboration.

  Dr Extance: If I may, there are two major roles I see from innovation: one is stimulating demand from those businesses who would not naturally innovate who need a little bit of a kick to encourage them to think about innovation, and the voucher scheme is important. The innovation advisory service that we are piloting again is about getting companies to think about innovation—in a fairly broad way, not just about science and technology—but the second one is clearly to make sure that our science and technology base is fit for purpose in terms of engaging the businesses, and is doing things that the business community and the region is interested in, and they are capable of really interacting properly with businesses, so the scientific work we have done. We are also working on the manufacturing and technology centre with Rolls Royce Aerospace and a number of other senior big players, JCB and others, to establish a centre which is about that middle ground between basic research and production, which is about taking technology, showing it in pre-production environments, demonstrating how you can take research through to product, and that I think is a role for us, very much to work with companies, to take the basic research that the Government research councils have funded, and translate that through to readiness level appropriate to businesses in the region.

  Mr Laverty: Mr Chairman, we have produced a little brochure, Harnessing Knowledge. Creating Wealth, which shows what we have done with the regions and it shows basically all the things we do over a variety of projects, and gives you a very good flavour of the broadness and type of our interventions.

  Q265  Chairman: I just got a bit depressed as I sat there and listened to you because you have no pharmaceutical business, no big financial services sector, we have not got—correct me if I am wrong—a large information technology sector yet either, it is developing in places like Cambridge obviously who are well ahead of us there. What we have got is a huge tail of automotive-related industries because the big producers typically left the West Midlands, Rover and Peugeot have gone, they are elsewhere, in Swindon, Newcastle, and Derby, and we have a huge tail of metal-bashing companies, typically family owned, less enterprising, so it is a bit of a challenge. What kind of higher added value can be achieved in this region with its history and legacy? It used to be the workshop of the world.

  Mr Laverty: It is a challenge but it is one that we are positive about, I think this region has lots of unique skills we can build on. The automotive industry, of course, had some very positive news recently with Tata taking over JLR; that is a company that is developing world-class vehicles, it has a large R&D centre down in Gaydon and we are talking to Tata at the moment, and have been for some while now, about them establishing their own R&D centre just outside Coventry, so there are real signs that they are looking to invest in the region. Structurally, yes, we have no oil and gas, no pharmaceuticals, no big spenders, we have already established that, but we can add value to every single company in the West Midlands. It may not be in those high valued added sectors, but every single company is capable of being in the value sector.

  Dr Hutchins: This is where the RDA/Advantage West Midlands needs to take some risks. Through our partnership with companies like QinetiQ, we are looking at building a partnership around quantum technology in Malvern. Now, that might be of interest to the world's leading academics but also to companies like Intel who can see world-leading R&D going on in a place like Malvern and migrate to participate in that. Then you get the spin-out companies emerging from that and our investment in Malvern Hills Science Park—we are on Phase 3 of those investments—house those types of companies, and projects like landing the national hub for the Energy Technologies Institute with the partnership or universities from within and outside the region, leveraging in a billion pounds of public and private sector investment, becomes a magnet for the world's leading academics, and then companies start to pay interest and follow suit. So that is our marriage broker role.

  Q266  Chairman: We will be hearing about more about the Quantum project tomorrow, but it has your full support?

  Mr Laverty: Yes.

  Q267  Chairman: I was with a metal-bashing business in my constituency which had been family controlled and the family said: "No, we cannot develop this business, we have not got the management expertise, we are going to sell out", and they sold out to a new team which is innovating in a whole stack of ways. The product is a very basic product but they are making it better, they are testing it better, marketing it better and they have all sorts of hidden innovation which does not feature, and they are turning this business into one that is really going places. To what extent can you do that on an incremental business with the hidden innovation taking place day in and day out in some small and medium-sized businesses? To what extent can we nurture that, or do we have to change gear and develop whole new industries in this direction?

  Mr Laverty: Generally, we cannot afford to just write off what is here; we cannot afford to say: They are doomed to failure, they have no value added activity, they are going to die out. We have to work with what we have and try and better what we have. One of the things we have majored on as an RDA is improving leadership and management skills across the region, and we see that as an activity that complements what the LSE does which tends to be lower level skills training. The start of the answer to your question is encouraging some of those firms to develop their workforce, and develop the leadership and management of their organisations. That is the starting point, and you have some chance of innovation being driven out, and some chance of them diversifying their product base, modernising their company and looking to invest in the business, but it is an uphill struggle for some of these organisations, particularly in the Black Country and North Staffordshire, where people do see investment in their workforce as a cost to the bottom line rather than an investment in the bottom line.

  Dr Hutchins: There is a role here through our regional economic strategy with our partners, particularly in the private sector, through the cluster programme, the sector-based work that we lead in the regional partnership with the private sector. One of the key issues for the 13 sectors or clusters that we support in the West Midlands is skills; another is innovation and companies getting together, talking about their needs and challenges, sparking off each other, looking at their innovation priorities, how they can be supportive, and the work that Business Link in the West Midlands takes forward through its innovation advisory service to help those individual companies and the sectors develop their innovation and R&D needs.

  Q268  Chairman: So you are saying the professionalisation of management and small and medium-sized businesses is a key part of developing a higher added value economy?

  Mr Laverty: We believe so, Mr Chairman.

  Chairman: I might talk to you informally about getting a better handle on what you are doing in that area to encourage that often very challenging process, because family businesses often do not like being told how to run their affairs!

  Q269  Mr Bailey: You will have heard earlier some, I think, reasonably complimentary things said about you by the academic sector and your involvement in bringing industry and academia together. How would you define what you have done to encourage links between the two?

  Mr Laverty: We were late, I am afraid, so we did not hear those very complimentary comments unfortunately!

  Q270  Chairman: Your Chairman did.

  Mr Laverty: We have had a very strong relationship with the region's universities since we were created. If you ask them, I would hope they would say almost to the last institution that we work positively with them, we have seen innovation and interaction with universities as something that is fundamental to the West Midlands' future. We are working with the business base; we have to try and make it as good as it can be to try and add value to our existing businesses, but we are looking to things like advanced materials, energy, digital media and some of tomorrow's businesses in the sector as the West Midlands future. Of course, that requires us to work very closely in collaboration with universities, not least Coventry University in this building that was funded by AWM, and there are two other buildings on this campus, an eye health centre and a digital media hub, both funded by us. So we have a strong relationship. We believe, and Michael Clarke from Birmingham University also is quoted as saying, that out of all the RDAs we have spent more money with our universities than any other RDA and we are proud of that. By our reckoning it is about £110 million over the three years that we counted up those interventions. So we have a very strong base. I am not saying we have cracked it but we understand now, having looked at the region, at the drivers and the productivity in the region, how important it is for this region to work on innovation, on skills, and to get the universities and the businesses in this region collaborating. It is very important that we understand the sign and the challenge now.

  Dr Extance: We have the Lord Stafford Awards in the region which celebrate and try to expose, if you like, some of the real successes of universities working with businesses, and one of the most successful schemes is the Knowledge Transfer Partnership, which is a national scheme, and that continues to provide really good examples of companies of all shapes and sizes working with the university base, and almost inevitably employing, then, the associate that works on the project as a full-time employee after the project is finished. Forgive me for giving a metal-bashing example of Metallisation, metal spraying, where their product worked but they did not really understand it. As a result of working with Aston University they understood the fluid flow in the spraying head; they got some software developed, and transformed a fairly hit-and-miss spraying operation into a very slick, computer-controlled, well understood process, so that is a good example. The INDEX voucher scheme, again, is already paying a great service to us, both in terms of the businesses being helped by having this small amount of university work done for them, but also for the university themselves in understanding how to work with the SME community, and understanding the language they use and, indeed, all the issues of timeliness and so on. So I would cite knowledge transfer partnerships as a growing and effective way of working in some detail, and we will be expanding the number of those in the next few years, and the INDEX really as an introduction of that marriage service. Already we are seeing a number of those companies wanting to go on to Knowledge Transfer Partnerships in which they have to invest £35,000 of their own money.

  Q271  Chairman: We have heard a lot about INDEX vouchers. Can you just explain it in a little bit more detail? Not now, but in writing subsequently.

  Dr Extance: With pleasure.

  Mr Bailey: Getting on to KTPs, representing West Bromwich West I, if you like, represent the heart of the metal-bashing industry, and on visiting companies I have had extremes—some singing the praises of Advantage West Midlands and others saying it just is not worth the hassle of getting involved—and some of it does seem to be reflected in some of the evidence we have had about involvement in KTPs. From the perspective of Advantage West Midlands what do you see as your role in, if you like, publicising KTPs, but also breaking down the barriers of those companies that might benefit from them but that up till now have not?

  Q272  Chairman: It may help you to know that our previous witnesses were very critical of the bureaucracy, the complexity of the KTP process nationally.

  Dr Extance: The process for KTPs is a national one; we have just begun work with the national body, the Technology Strategy Board, around extending the regional version, and we are looking to see how we can simplify that process because it is recognised nationally as complex. What is happening through projects like INDEX and others in the region of schemes which are not as sophisticated as Knowledge Transfer Partnerships is the beginning of a relationship with the university, albeit a small one, that then enables the business to understand the university and to work better, so what I would say is to go in cold with a small company with a Knowledge Transfer Partnership as your entry ticket is very tough, but to warm them up, if you like, to engage them, either through the voucher or some other small scheme so that people get to know one another and really understand the issues, is the most effective way. In terms of publicity, again, we have had over 600 companies applying for the INDEX voucher since last March, and we have awarded over 220 vouchers to companies, so over 600 companies now have, in a sense, specified a problem they want to work on. That is quite a substantial number of companies.

  Dr Hutchins: To supplement that, we see the link between the importance of the innovation and the R&D agenda, and the skills agenda. We often see where we have excellent leadership and management in the organisation of a company, no matter what size. If the chief executive, the managing director, has that drive and that foresight then we get the connection with the innovation agenda.

  Q273  Mr Bailey: Looking at my own particular locality, which in many ways highlights the problem, would you say the absence of a higher education establishment within—and Wolverhampton might object but I am talking about the West Bromwich area, both impacts on the skills and aspirations of the potential workforce, but also the culture of the actual business management within that particular locality.

  Mr Laverty: I think you can make that general connection. We know that businesses like to work with higher education establishments that are in close proximity. A face-to-face meeting than having to drive or getting on a plane or train. Sometimes collaboration needs to be able to use physical infrastructure, you might have to go to a university and use a lab or whatever, so that is very difficult. The big organisations in the region, the Jaguars, the Land Rovers, the JCBs, go anywhere in the world but for the local organisations, to try and encourage their first step on the ladder, it has to be local, face-to-face, and something they can fairly immediately see some value to.

  Q274  Mr Bailey: We have obviously touched on some barriers. Are there any others that you see being a problem to KTPs being established, which have not been covered by the evidence so far?

  Mr Laverty: It is more of a general point. There are parts of the region, and certainly Adrian Bailey's constituency might be one, where there is a cultural issue where lots of the organisations do not seek out help and, when they do, they want help on their terms so it is typically "Can we have a grant and don't tell us what to spend it on, just give it to us, thank you very much", and, of course, that is not what we are trying to do. As my colleague has said, there needs to be a certain amount of enlightenment here otherwise good money follows bad. These organisations need to be prepared to help themselves, and need to have done a certain amount to demonstrate they are prepared to help themselves really and truly before it is worth anyone helping them, otherwise you are just wasting money, and there are parts of the Black Country and North Staffordshire that have that cultural deficit that other parts of the region do not have.

  Dr Hutchins: Hence one of the priorities of the Regional Enterprise Board is to promote an enterprise culture in the region. We have particularly focused on two or three groups, women's enterprise, young people's enterprise, and enterprise amongst black and ethnic minority groups, trying to stimulate the market in those three areas, with some notable success, particularly in the women's enterprise area.

  Q275  Mr Bailey: Moving on to the Science City investment, you have mentioned Birmingham in particular and I do not want to go over old ground, but what basically are you looking for from it?

  Dr Extance: Science City is a fairly big programme for us, and it tries to recognise that if we are going to promote the West Midlands and Birmingham as a place where high technology companies can come and invest and grow then we have to do several things, and one of them is to make sure our basic research infrastructure is capable, as we have talked about. We have selected those three areas, energy, advanced materials and translational medicine, as three big areas where we believe, by building a research infrastructure, we raise the presence of Birmingham and the West Midlands and therefore we would hope to attract companies to want to locate here for research and development to be carried out in our universities. The second key outcome is clearly around knowledge transfer and spinning out and growing companies around the region as a result of our investment in that initial early and translational stage of research, so we have already seen a number of companies showing interest because we have invested in these areas and wanting to be part of our activity. It is no surprise we are seeing the beginnings of companies like Tata, like Ericsson, wanting to build research centres in the region, because they can see that the university base is credible and is working together. I think the collaboration of two major research universities, Warwick and Birmingham, that previously had limited collaboration, is a major step because it now means that businesses can access skills from both establishments through that collaboration. The Higher Education Funding Council backed up our investment with another £10 million of their money as a result of our work on getting those universities to collaborate, so we are already leveraging research money into the region which will help deal with our problem about R&D expenditure. We are already beginning to lever in Research Council Money and HEFCE money on the back of our investment.

  Q276  Miss Kirkbride: I want to ask you for your views on R&D tax credits, whether they are good, bad or too mixed, depending on what sector you are in. Or what should we do instead?

  Dr Extance: In principle, it is a good idea. The concept is good, and clearly we are seeing a number of the larger companies gaining considerable benefit from them. There is anecdotal evidence, and I have not done the valuation, from companies in the region that it is quite a difficult process. A number of them just do not bother and their professional advisers are not fully up to speed, so I think there is some work to do with professional advisers to make sure they are capable of supporting it. I have one anecdotal example from a company I will not name because this is a public forum who said to me that, as a result of having the R&D tax credit, their senior management ploughs back the credit money into their longer term R&D, and without that R&D tax credit they would have a much harder job of having their longer term, more blue skies orientated R&D programme, so that is a good news story, but there are some issues around the take-up of the R&D tax credit which I think may just be a matter of time and experience.

  Q277  Miss Kirkbride: But primarily the big ones do it and the small ones do not?

  Dr Extance: My view is there is a greater take-up amongst larger companies than small.

  Q278  Miss Kirkbride: Is there another way of doing it?

  Dr Extance: In a sense we have a portfolio of ways of doing it; we have vouchers, knowledge transfer partnerships, collaborative R&D through the Technologies Strategy Board, we have R&D tax credits -

  Q279  Miss Kirkbride: You have so many things you are all confused?

  Dr Extance: I would say you need a portfolio of offering because companies just like us, they behave and respond differently to different things. One man's KTP which is wonderful is horrendous to another guy, who says the R&D tax credit is absolutely fantastic. So you need a spread, there is no single solution. The R&D tax credit offers a very attractive one to some companies, but it maybe does not provide the stimulation to do R&D. If companies are doing it anyway it provides the feedback, but it does not necessarily stimulate people to do R&D in the first place.

  Dr Hutchins: This is one of the reasons why in the region we are leading the business support simplification programme on behalf of BERR and Treasury to try and reduce the plethora of schemes out there and to make better use of public money, to avoid duplication and to rationalise the programme down to a portfolio of 30 odd schemes in the region which are available regionally and nationally, and the RDAs are leading that in each of their regions.


 
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